BDO reacts to Corporation Tax exemptions for dividends from overseas companies

Included within today's Pre-Budget Report are the widely expected proposals for a corporation tax exemption for most dividends received from overseas companies.  This exemption will be available to medium and large companies from March 2009 regardless of the level of shareholding

Stephen Herring, Senior Tax Partner BDO, comments: "The Chancellor has rightly bowed to the enormous pressure to the UK corporate tax base following the decisions of a number of high profile listed groups to migrate their headquarters from the UK to Ireland and other, more favourable tax jurisdictions."

This announcement ought to be widely welcomed as it brings the UK corporate tax regime in line with many other European territories.  However, UK industry will wish to examine the fine print of the legislation closely to assess the limitations including the proposed anti-avoidance legislation and the restrictions on interest relief.

It is announced that from 2009, UK corporation tax deductions for interest expenses will be restricted under a new "worldwide debt cap on interest".  The Treasury may perceive this as the simply preventing taxpayers from "having their cake and eating it", as, otherwise, UK based groups from could still set their group-wide borrowing costs against UK taxable profits whilst being exempt from tax on overseas profits.  However, a number of groups will be unfairly prejudiced by a blanket restriction and resent the reduction in tax relief on the costs of expanding overseas.

A new "Targeted Anti-Avoidance Rule" and changes to the UK "Controlled Foreign Company" rules are also set to be introduced, which will be scrutinised carefully by taxpayers who will be wary of further increase the costs and complexity of the UK corporate tax system.

Stephen commented, "The Treasury's previous proposals in this area caused widespread controversy and are perceived by some to have contributed to the erosion in the UK tax base.  As ever, the devil will be in the detail and UK domiciled international groups will wish to reserve their judgement before the overall impact of these measures can be assessed when the draft legislation is issued in December.  There is a very fine balance between protecting the Exchequer and promoting the UK as a competitive tax regime for global businesses. The Chancellor is no nearer solving this conundrum."

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For more information, please contact Matthew Longbottom at BDO on 020 7893 2717, 0797 619 8786 email matthew.longbottom@bdo.co.uk

Notes to editors:

BDO LLP operates across the UK with over 3,000 partners and staff. BDO LLP is a UK limited liability partnership and the UK Member Firm of BDO International. BDO International is a world-wide network of public accounting firms, called BDO Member Firms, serving international clients. Each BDO Member Firm is an independent legal entity in its own country. The Belfast Firm is operated by a separate Partnership.

BDO LLP and BDO - Belfast are both authorised and regulated by the Financial Services Authority to conduct investment business.

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Top 50 Where Women Want to Work - The Times 2007
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